Brexit, agriculture, the WTO, and uncertainty

Written replies to questions for the inquiry of the UK House of Lords’ EU External Affairs Sub-Committee on ‘Brexit: future trade between the UK and the EU’

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By Peter UngphakornPOSTED OCTOBER 22, 2016 | UPDATED OCTOBER 22, 2016

On October 17, 2016 the first batch of written evidence was published for the UK House of Lords’ EU External Affairs Sub-Committee’s inquiry on Brexit: future trade between the UK and the EU. Most were replies to questions from the sub-committee.

THE QUESTIONS:
Following the first evidence sessions of the inquiry, we have some questions relating specifically to agriculture and the WTO, which we would very much appreciate your assistance with. If you would be willing to answer these questions for the Committees, they would form part of the formal written evidence volume for the inquiry, and would be used as part of the Committees’ report into the frameworks for UK trade after Brexit.

REPLY (PREFACE):For all questions, there is still a considerable amount of uncertainty because we don’t know the answer to three underlying questions: (1) what the UK is going to seek in the whole Brexit package, including in the WTO,[1] and what its attitude to its counterparts will be; (2) how the EU will respond; (3) how the rest of the world will respond.

We can only make educated guesses. Other countries’ reactions will depend on the content of the UK’s position on the WTO, on its diplomatic skills in sustaining their goodwill, and on their own internal pressures and priorities. If the UK, EU and the rest of the world do not cooperate with each other the negotiations are likely to be lengthy and messy.

That said, it’s important to note that there are a number of different views on this. Some experts argue that the UK can identify its legal rights as inherited from those of the EU, and then establish its own schedules with little or no negotiation. There might be some limited bargaining over tariff quotas and domestic support. The UK could make its legal claim, leaving it up to other countries to challenge anything they dislike through the WTO’s dispute settlement procedures — and the UK would prevail.[2]

Counter-arguments include the view that WTO dispute rulings are unpredictable because of the complexity of WTO and international law and because of adjudicators’ individual thinking, meaning the fate of the legal argument would be uncertain. Some also argue that because this position is based largely on law, it overlooks processes, politics and diplomacy in the WTO, including what might happen if other countries claim the right to negotiate with the UK, and the UK replies “see you in court”.[3]

House of Lords EU External Affairs and EU Internal Market sub-committees, 8 September 2016, with Piet Eeckhout, professor of EU Law, University College London and Richard Eglin, Senior Trade Policy Advisor, White and Case LLP

The questions that we have are as follows:

What will be the main issues relating to agriculture in the renegotiation of the UK’s WTO schedules following Brexit?

ANSWER:
Potentially most issues covered by two of the three “pillars” of WTO agriculture commitments[4] —market access and domestic support. How difficult negotiations on these will be will depend on how cooperative with each other the UK, EU and rest of the world are.

FIRST, “export competition”, the third pillar, which we can quickly get out of the way. It includes export subsidies and three areas of policy that may contain hidden subsidies: government involvement in export credit and insurance, food aid, and state trading exporting enterprises. WTO members have agreed to outlaw export subsidies and to discipline the three other components,[5] albeit in a somewhat weaker form than the EU had originally demanded. If the UK accepts the whole package, then this should be implemented without any problems.

SECOND, market access. Here the most difficult negotiations will be about tariff quotas (TRQs) (discussed in the next question).

For regular “most favoured nation” (MFN) tariffs, many of the EU’s scheduled tariffs can be adopted by the UK with little difficulty and this would probably come under simpler WTO rules on “rectifying” schedules. However, some MFN tariffs may still face negotiations if other countries (such as South Africa) question the UK’s need to continue with the EU’s complex tariffs protecting certain producers (such as Mediterranean orange producers). UK retailers and consumers might also want lower tariffs and cheaper products. This could lead to a debate within the UK itself, along with a triangle of external negotiations between the UK, EU (on behalf of Spain et al) and non-EU exporting countries.[6]

There might also be some discussion over “special safeguards (SSGs)”, where import duties can be raised temporarily to deal with import surges or price falls. Some countries might question whether the UK needs to reserve the right to use the safeguards on the EU’s entire list of eligible products, particularly if the UK is not a producer.

FINALLY, domestic support. Here the key question is about the types that distort trade (by influencing prices or stimulating production, or both), calculated in the WTO as aggregate measurement of support (AMS).[7] There is an on-going discussion among legal and trade experts about the appropriate basis for extracting the UK’s AMS entitlement from the EU’s.[8] But the actual support provided by the EU is much lower than its limit in the WTO — in 2012/2013 only €5.9bn or 8% of its €72.4bn ceiling, according to the EU’s latest notification to the WTO. Therefore some “ballpark” calculation for the split ought to be agreed without too much difficulty. If there is a problem, this could well be a sign of ill-will between the UK and the countries concerned.

The EU has, as part of its schedule of commitments, established tariff rate quotas (TRQs) on the import of agricultural products from third countries. Other countries have done the same for agricultural imports from the EU. The separation of these quotas between the EU and UK post-Brexit has been named as a major difficulty. Why is that the case? What would be the most contentious issues?

(There is a third aspect to consider as well: the UK’s access to the EU’s post-Brexit TRQs, particularly if there is no UK-EU deal that includes free trade in goods. Like the UK, the EU will also have to modify or rectify its TRQs and to negotiate. The UK would want to be part of those talks.)

The reasons are both political and technical.[9] TRQs are on the front line in the battle between exporters with offensive interests and import markets with defensive interests. They are on products where exporters fight hardest for market access, and importing countries are under the most intense domestic pressure to protect their producers.

In summary, the task of extracting UK TRQs from the EU’s requires potentially contentious decisions on:

how the present EU TRQs should be split to create separate TRQs for the UK and the EU–27

how the shares for specific exporting countries should be handled (their proportionate interests in UK and EU markets may vary)

how UK-EU trade should be added to the TRQs, and how the sum of the EU–27 and UK TRQs should be expanded for this and other purposes

whether these adjustments can still fall under “rectification” of schedules rather than “modification” which is a lengthier process with more specific requirements for negotiations

Each of those questions is both technical and political with real commercial interests involved.

UPDATE

The goods schedule for the EU’s enlargement in 2004 to 25 members (EU–25) was certified and circulated in December 2016. Details are here

A list of the TRQs on agricultural products is annexed (pdf) to these replies.

In more detail, dairy, beef, lamb, poultry meat, sugar, fruits and vegetables and many other products all have EU TRQs. Several of these products are contentious in free trade talks (such as TPP across the Pacific and the trans-Atlantic TTIP) and are likely to continue to face the toughest post-Brexit negotiations. How difficult this will be depends on how accommodating the UK, EU and the rest of the world are with each other.

TRQs arose because for many agricultural products, the tariffs that resulted from the 1986–94 Uruguay Round negotiations were so high they would seriously obstruct imports. Exporting countries demanded some market access and the compromise was lower duties on limited quantities, the TRQs.

Technically, as well as politically, TRQs are complex because many of them are also divided up among exporting countries. For example, in the latest available EU schedule (for the old EU–15), the duty-free lamb TRQ is shared out among Argentina, Australia, Chile, New Zealand, Uruguay and nine other countries (several now EU members) with only 200 tonnes out of 283,825 left for “other” countries.[10] And UK-EU trade also needs to be taken into account if the UK does not have free trade in goods with the EU–27 — for obvious reasons, the UK’s present imports and exports within the EU do not come under the EU’s TRQs.

UK exports to the EU via the EU’s TRQs: note that as things stand, if the UK wants to export lamb to the EU through the EU’s TRQ, it will have to fight for a share of the 200 tonnes for “other countries”. But in 2015 it shipped almost 75,000 tonnes duty-free to the EU.[11] That’s why it would want to participate in negotiations over a TRQ for the EU–27 if it doesn’t have duty-free access to the EU market. In fact, it may be difficult to separate the negotiations over the UK’s and EU’s TRQs.

As for other countries’ TRQs on exports from the UK and EU, most commentators have only mentioned these in passing.[12] Splitting existing quotas into UK and EU components would be less complex than for their own import quotas. For example the overall current quota size would not need changing, but some negotiation cannot be ruled out.

In the negotiations over the division of these TRQs, which countries would have an interest in increasing or decreasing the UK’s TRQs, and why?

Most if not all countries that currently use the TRQs have an interest in negotiating the UK’s, plus possibly some new players. They will also have an interest in the TRQs left for the post-Brexit EU–27, one reason why it will be difficult to separate the negotiations over the UK’s and EU’s schedules. (At this stage we are not discussing increasing or decreasing the UK’s TRQs, simply establishing how big they should be.)

Countries that currently have shares of the quotas specifically allocated to them — because of their commercial interests — would have a particular claim. If establishing the UK’s and EU’s separate TRQs is seen as “modifying” the schedules, then there are WTO rules that state broadly who is eligible to negotiate. They are countries that were originally involved in the negotiations (and any others having a “principal supplying interest”) and countries with a “substantial interest”.[13]

These are not defined. Excluded countries sometimes argue that they should be involved as well, as China did when the EU modified its schedule on poultry import quotas.[14] It’s possible to envisage new players claiming a “substantial interest” for example countries that are starting to become major exporters of cereals or beef but did not previously have shares of the EU’s TRQs. The UK and EU could argue that they were not renegotiating the TRQs, simply splitting them. Much would depend on the approach adopted and how other countries responded.

Does the fact that the EU’s schedule has not been certified complicate the division of TRQs between the EU and the UK?

It depends. If all the countries concerned are willing to accept the schedules that the EU is applying in practice, then negotiations can proceed on them. But those schedules (assuming they exist in an up-to-date form) are uncertified and are therefore still secret. If other countries wanted to be difficult they might insist on knowing the schedules and negotiating from official versions. This is a hypothetical situation; we don’t know how it would turn out.

What non-tariff barriers are most pertinent to trade in agricultural products in the absence of any preferential agreement?

It depends on the product and the supplying country, but the presence or absence of a preferential agreement is probably irrelevant since the preferences only apply to tariffs, not non-tariff measures. (Lower tariffs actually increase exposure to non-tariff barriers.)

All agricultural products come under the two WTO agreements dealing with product standards and regulation, and over the years, concerns have been raised in the WTO about a wide range of issues.

The two are the agreements on Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT). SPS deals with food safety (where related to disease or toxins, for example) and animal and plant health; TBT includes other product standards (including some aspects of food and “health”, such as nutritional requirements), labelling and other regulations. The committees dealing with each have a good record of resolving problems and avoiding litigation.[15]

Although all measures under these agreements can be scrutinised in the WTO, most are trouble-free — non-tariff barriers are often justifiable, for example to prevent diseases spreading.

Quite a few concerns are raised in question-and-answer sessions. They focus on whether the measures are justified or whether the process of applying them is appropriate, either because they cause problems generally or because individual exporting countries face difficulties.

The most commonly questioned SPS measures deal with: animal diseases such as BSE, bird flu, foot and mouth disease, and African swine fever; plant problems such as fruit flies and other pests, and plant diseases; and food issues such as pesticide residues and aflatoxin contamination (associated with fungi). The wide range of concerns raised about agricultural products under TBT include health labelling, and controls on the consumption of tobacco, alcoholic drinks and “junk food”.

Issues raised also deal with mutual recognition of various controls and whether measures countries take can be considered to provide equivalent protection against risk even if the actual measures are not the same. Increasingly discussed are standards set by the private sector and whether governments have a responsibility to discipline these under the WTO’s inter-governmental agreements.

Developing countries do find it difficult to meet some standards in developed countries, and quite often technical assistance is given to help them upgrade their inspection services and other areas of infrastructure (a topic the UK could consider as it leaves the EU).

In one respect, the UK will avoid a problem that it sometimes faces as an EU member: failure to observe “regionalisation”. When WTO members restrict problematic products, they are supposed to focus only on those from the regions where the problems exit, such as where an animal disease (foot and mouth disease, BSE, etc) has been found, not entire countries or other territories. The EU has frequently complained that products from all its member states have been targeted even though the disease only exists in some areas of some of its members. By leaving the EU, the UK would not suffer bans on products from the whole EU.

[8] See for example, Alan Matthews, “WTO dimensions of a UK ‘Brexit’ and agricultural trade”, http://capreform.eu/wto-dimensions-of-a-uk-brexit-and-agricultural-trade/; and Lorand Bartels’ article cited previously, pp.11–12. Conversations I have been privileged to observe include questions such as whether splitting the UK’s AMS from the EU’s should be based on historical shares from the 1986–94 Uruguay Round negotiations, when the EU’s schedule was originally established, or more recent figures, and how a suitable exchange rate might be established for converting commitments in euros to sterling (or even whether to dodge exchange rates completely and keep the UK’s commitments in euros)

[12] See Alan Matthews’ article, previously cited. He says: “in the case of [other countries’] import TRQs there is a more realistic possibility that these might be divided between the UK and the EU27 if there were a will to do this” (my emphasis)